Which ITR form should you use to report F&O income?

Some traders use ITR-4 which allows the benefit of presumptive taxation, others use ITR-3

- Aprajita Sharma

Trading in futures and options (F&O) is now a source of income for people from all walks of life-self-employed, salaried, homemakers and even pensioners. And its growing popularity reflects in the number of active derivatives traders in the markets-the number surged 8-fold, from less than 0.5 million in 2019 to 4 million as of August, as per data from the National Stock Exchange. But, as with every other source of income, this one also comes with a tax liability.

To be sure, tax authorities treat earnings from F&O as business income, be it gains or losses. So, under which section of the Income Tax Act should traders file this income? A lot of F&O traders declare F&O income under section 44AD of presumptive taxation scheme. Income tax return (ITR) form 4, or ITR-4, is applicable in this case. However, some chartered accountants are of the view that F&O income does not fall under presumptive taxation scheme. Traders should rather file ITR-3 and pay taxes on the same as per their slab rates. ITR-3 also allows you to declare shortterm and long-term capital gains from the cash segment. ITR-2 is filed in case of only capital gains and no F&O income.

Presumptive taxation

The presumptive taxation scheme under sections 44AD, 44ADA and 44AE of Income Tax Act, 1961, gives relief to small taxpayers from maintaining accounting books and doing audits. Section 44ADA is for specified professions such as legal, medical and accountancy, etc. Section 44AE is for those into transportation business.

Any other business with a turnover of less than ₹2 crore can take advantage of the presumptive taxation scheme and declare profits or losses under section 44AD. Owners can presume their business income at 8% of the turnover in case of non-digital transactions and 6% in case of digital transactions.